“The Secret Penny Stock that Supplies Apple”

By Travis Johnson, Stock Gumshoe, January 25, 2010

Well, the folks at Stansberry are now releasing the penny stock newsletter that they’ve been testing for a few months — and of course, they’d like you to subscribe. The editor is Frank Curzio, who used to run a similar newsletter at TheStreet.com focusing on stocks under $10.

So just as a warning, both Curzio and the Stansberry folks routinely use the term “penny stock” to mean anything with a relatively low stock price of under $10 or, sometimes, under $5. Some of the stocks they’ve teased as “penny stocks” in the past have been billion dollar companies, so they aren’t necessarily the minuscule micro-caps that you might picture when folks tease “pennies” (and yes, for most of us at least, that’s probably a good thing).

But given that, the launch of this newsletter is riding a pretty big wave of promotion — so I imagine the stock will show that attention (and as I type this morning, it already has — up several percent so far). And no, I don’t imagine that it’s an accident that this promo is coming out at the same time that everyone is talking up Apple’s new product announcement for later this week, this tease comes rolling in on a wave of investor interest … despite the fact that the shocking news that the teaser hints at has really been public for well over a year.

What Curzio’s publisher is teasing is a penny stock company that supplies a part for Apple’s iPhone — here’s how the ad puts it:

“This tiny company beat out several giant blue chip firms (including Texas Instruments and Qualcomm) for the exclusive contract, which is estimated to be worth several billion dollars.

“The new deal gives this small company exclusive rights to supply Apple with a vital new component of the newest version of the iPhone… by far the hottest and fastest selling mobile phone in the world. (USA Today recently called these phones “the fastest-growing consumer electronics product ever.”)

“Of course, a deal like this is absolutely huge for this penny stock, which we believe could be worth several billion dollars in as little as a few years from now.

“‘It’s a great blessing for a company to get a design win like this,’ says Greg Quirk, product manager for TechOnline.com.”

And of course, it’s an Apple product, so the suppliers are top secret — no one is supposed to know that these fabulous gizmos weren’t extruded whole from Steve Jobs’ ear.

Some examples are given for suppliers who got parts into other hot Apple devices — particularly Synaptics, which invented (I think) and supplied the scroll wheel for the ipod, and several others, mostly semiconductor companies that made one of the many little chips in each device.

Here’s some more on the secrecy behind the tease:

“Apple is doing everything in its power to keep the identity of this small company a closely guarded secret.

“As tech journalist Jonathan Brickman writes, ‘Apple won’t disclose it.’

“Why all the secrecy?

“Well, no one knows for sure, but one of the reasons could be that this company’s new component is so good that it’s currently being used by the military for several state of the art defense applications.

“In other words, we speculate the technology is so advanced—and unlike anything else on the market—that Apple is doing everything it possibly can to keep it a secret from competitors.

“Apple has even required the supplier to keep quiet about the deal. In fact, you won’t find the words ‘Apple’ or ‘iPhone’ written anywhere in this small company’s annual report. “

So what is the part that this top-secret company is making? The teaser calls it the “power amplifier,” and apparently the company behind it has created products so advanced that they’re also used in several military programs, and in the Large Hadron Collider Project at CERN (the “big bang” reenactment).

So … that’s the basic background, the implication that if the iPhone continues to grow dramatically in sales, this supplier will reap gazillions — and you, after buying in at today’s low low price, will be able to finally retire to that yacht on the Riviera.

Almost makes you want to take apart your own iPhone, eh?

We get a couple more clues about this company, for your sleuthing pleasure:

“For example, another remarkable thing about this company is its fundamentals. It has no debt… over $130 million in cash… and owns several other profitable operations, including components businesses for the mobile Internet, wireless networks, and the U.S. military.

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“Plus, there’s more you’ll learn about this company that makes it an even better investment than Frank initially thought…

“You see, since the Apple deal, this small firm has been quietly locking up deals with the competition as well…

“For example, this company also signed a deal with Research in Motion to supply the “power amplifiers” in the newest version of the Blackberry, the #2 phone on the market right now!

“And that’s not all… it signed similar deals with Palm, Sony, and T-Mobile, makers of some of the best selling phones on the market.”

So, we toss that big ‘ol pile of clues into the mighty, mighty Thinkolator … and after a wee bit of cogitating, I can tell you that this company must be …

TriQuint Semiconductor (TQNT — you can get a free trend analysis for TQNT from MarketClub, one of my advertising partners, by clicking here)

And yes, the long weekend of promotion has done wonders for the shares so far — up about 7% as of Noon today.

TriQuint is reportedly the supplier of the power amplifier chip in the new iPhone — but of course, the “new” 3G iPhone has been around for a long time, and this news was known 18 months ago. It was a surprise, but it was a surprise that was revealed by the iPhone dissectors back in the Summer of 2008.

Incidentally, a report on this dissection of the iPhone that revealed the surprise inclusion of TriQuint’s chip was published in many places, but one of them was the online Oregonian newspaper, with an article that you can read here if you like. That article is also quoted in a couple places in the teaser, including the quote from the journalist, Jonathan Brickman (his name’s actually Brinckman, but that’s not quite enough of a switch to throw the Gumshoe off the scent).

And yes, that article came out in July of 2008, when TriQuint shares were … well, right about where they are now. They did get a bit of a boost from the iPhone news at the time, then collapsed dramatically when the market swooned (you could have bought shares around $2 if you’d had nerves of steel and unshakable faith), and then showed a steady but impressive recovery, the stock climbed up about 300% from the lows until October of last year, when the then-$8 share price took another tumble to about $6 on reduced guidance.

So that’s where we stand now, the newsletter promo is clearly helping the stock a bit, but it closed a little below $6 on Friday and is around $6.30 as I finish up my musings this afternoon.

And in case you’re wondering, yes, the other clues do match as well — they do have a bit over $130 million in cash and no long term debt, and they are currently marginally profitable but analysts see them doing better in the year to come, with a forward PE ratio of about 12. They also do a lot of military contracting, largely in radar and communications technology, as well as networking chips and foundry work for semiconductor fabricators (that’s what they did for the products that went into the CERN collider, totally different than their iPhone power amplifier chip).

This is a competitive sector, and I certainly don’t have the expertise to tell you whether the chips from TriQuint are better than those from RFMD or Anadigics or any of the other providers who work on similar kinds of products — it could easily be that they won deals as much because of their willingness to be flexible on design (or cheaper) as because of the preeminence of their technology, but I don’t really know. They are looking at the smart phone market as a key for their growth, since smart phones and data transmission can apparently bring in significantly more chip revenue per phone than simple power amplification for phone calls, and according to the company the handset market currently provides better than 60% of their revenue. You can see a recent investor presentation, as well as their SEC filings and other background info, on the TriQuint Investor Relations page here if you’d like to learn more.

So is this going to be up 200%? I have no idea — they had a rough time late last year when they disappointed investors by downplaying 4Q guidance, but the stock did recover a bit two weeks ago when they then upgraded that same guidance by a bit on the back of a stronger-than-expected quarter. They did also say that they expect the first quarter to be seasonally weak, as usual, so if revenues are going to soar thanks to the iPhone one imagines they’ll be soaring a bit more gradually — their power amplifier is obviously not the “heart” of the iPhone, advanced though it may be, but I haven’t seen any reliable indicator of how much these parts sell for … the phone breakdowns I’ve seen put most of the RF power chips at somewhere just over a dollar (by way of comparison the display might be $20, the camera module $10, etc), and the overall iPhone 3GS cost to manufacture has been estimated at just shy of $200, but probably no one outside Apple really knows for sure.

And yes, TriQuint has lots of other business — their chips for handsets supply the sales volume, but the margins are probably substantially higher in the military products (10-15% of revenue), which also probably lead to technological innovations filtering down to civilian use. The semiconductor stocks in general seemed to get a little bounce this morning from the bullish Intel article in Barron’s over the weekend (along with some related optimism from the hard drive companies, etc.), and the smart phone revolution is clearly here and will clearly help drive demand for more advanced chip sets, but I can’t tell you whether or not TriQuint will be a big winner as a result. It’s not an unknown stock or a particularly tiny company (market cap of just under $1 billion), though it may be somewhat overshadowed, at least for non-insiders, by better-known competitors including, among dozens of others, RFMD (which is about the same size) and Infineon (much larger).

And the stock, with that forward PE of 12, is probably priced for decent performance, not for dramatic growth, so if Curzio is right about their prospects the shares could certainly see a boost — will they be up 200% in a year or two? You tell me — toss your comments in the ring by using the handy dandy box below.

As for Curzio’s newsletter itself — I’ve written about his early picks for Stansberry once before, but that was in the Irregulars-only Friday File last month, and we haven’t yet seen any reviews from subscribers — if you were one of the early subscribers to this one, click here to share your Penny Stock Specialist thoughts with your fellow investors.


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